Cost-based Phillips Curve forecasts of inflation

► Since prices are a function of marginal cost, inflation is crucially dependent on the economy's level of marginal cost. ► This paper tests a new candidate for marginal cost, which is measured following the theoretical methodology of Bils (1987). ► We use the Phillips Curve to conduct out-of-sample inflation forecasts using all leading candidates of activity variables. ► For almost all cases, forecast errors are lowest in the regressions with the new marginal cost variable. ► Therefore we believe that this new marginal cost measure is an improvement over prior attempts to proxy for marginal cost.